John Hagel's Wake-Up Call For Business -- How To Launch A Change Movement

Last month, Deloitte published the grim findings of its Shift Index 2016, which showed that the 50-year decline of the rates of return on assets of U.S. firms continues. I spoke with John Hagel, Founder and Chair of Deloitte’s Center for The Edge about the findings and what could be done to turn things around.

John Hagel: Hopefully, it’s a wake-up call. The core message is that technology is creating this mounting pressure to do things differently. It’s creating a world that is very different from the world that businesses have operated in the past. So until they figure out how to reconfigure their businesses and their operations, they are going to face mounting pressure and the deteriorating performance. The positive side is that the situation creates virtually unlimited opportunities if they can figure it out and adapt to the new world.

Hagel. Unfortunately the reaction of many companies when faced with mounting pressure is to do what they have always done, that is to squeeze harder on what they are currently doing, and try to squeeze more out of everybody. One of the most striking contrasts is the metric around labor productivity, which has been steadily increasing, versus the return on assets which has been plummeting.

Image: Deloitte Center for the Edge

Denning: The Shift Index 2016 gives many examples of the sharing of information and knowledge flows at the individual level, but not so many examples at the company level. Why is that?

Hagel: That’s the reality. The Shift Index has made the point from the start that individuals have been embracing the technology and its capabilities shift more readily and successfully than the companies and institutions are. It applies both as a customer and as a society. As customers steadily acquire more power, they are harnessing these flows of information knowledge. They now have a better understanding of the available options. They have information about the options and can shift from one option to another when it’s in their interest.

Scaling From The Edge

Denning: You write both in the Shift Index 2016 and in your essay in the Edge Perspectives that you recommend starting small and starting at the edge; is trying to move these big old firms as a whole too much of a challenge?

Hagel: The idea of “starting small” is a more general proposition. It reflects again the increasing infrastructure and capabilities of the technology that we have available that allow us with small moves to have much greater impact than ever before. That can apply both within the context of a large organization or for individuals out on their own as entrepreneurs. If you are driving change from the edge, you can do that with fewer resources and scale more rapidly than was possible in the past.

Denning: I was struck by the example of Discover Weekly at Spotify. That was generated by a team of just a couple of people in four months and generated tens of millions of new customers for Spotify. A small move had huge consequences.

Hagel: There is also the whole notion of leveraged growth. In the past, the choices was between organic growth or acquired growth. Now there is the third option of leveraged growth, which is mobilizing third parties without buying them to add value to customers, and without necessarily developing the capabilities yourself. Uber is an obvious example.

Denning: The thing about the Spotify example: it took place in an organization totally focused on harnessing new opportunities at scale. They have more than a hundred teams that are autonomous and able to move rapidly and test hypotheses, without having to go up the management chain with a whole lot of rates of return analyses and justifications to get top management approval. You can’t imagine what happened in Spotify with Discover Weekly occurring in one of these big slow moving bureaucracies with a steep hierarchy where all important decisions are made at the top. So that raises the question whether you need both: do you need both scaling from the edge and a corporate context that is supportive of that kind of innovation and initiative? Do you need both?

Hagel: In our experience with scaling at the edge, you need at least one senior executive, not necessarily the CEO, who is a champion and who can fly air cover for the edge initiative. We are skeptical about the possibility to get alignment of the full leadership around scaling edges, given all the traditional mindsets, and entrenched practices. Full alignment is very difficult to achieve.

Examples Of Successful Change

Denning: Do you have examples of reasonably sized firms where you have at least one senior executive who acts as a champion and supporting the change?

Hagel: We have focused on two examples: they are interesting because they are both in traditional markets and industries. One is State Street Bank and the other is Li & Fung.

State Street Bank started as a very conventional retail bank. It was founded in 1793. In the 1970s, it faced increasing pressure in its core business. A C-suite executive realized that they needed to find a different way of doing business and came up with the idea of renting out some of their transaction processing capabilities to other banks, who were facing similar pressure. It met a need in the marketplace and they scaled that very rapidly. Over time, they walked away from their traditional core business. It gave them a new way to define their business, their processes and operations, their approaches, and their culture. It served them well.

The other example is Li & Fung, a global supply chain manager primarily for US and EU brands, department stores, hypermarkets, specialty stores, catalogue-led companies, and ecommerce sites. It started a hundred years ago. For most of its life, it was a very conventional broker, making deals with designers and manufacturing operations. In the 1970s, they faced more margin pressure and they set out to reinvent themselves. They became a trusted adviser to these apparel firms and the orchestrator of very large networks of specialized capabilities.

In neither case, did they say: we have to change everything from the top down. They didn’t adopt a big bang approach to change. They went to the edge and grew it from there. In both cases, there was at least one champion at or near the top.

The Problem Of The Back-Office

Denning: We see in the firms in the Learning Consortium a huge risk in bringing in an outsider at a high level. A new CFO or CMO can really set you back. Before you know it, the firm is back operating as a top-bureaucracy. Instead of Agile, people are filling out forms again.

Hagel: Sadly that repeats itself over and over. In Silicon Valley, that’s a very common pattern. You have these very entrepreneurial companies, but as they start to scale, they bring in “adult supervision.” Often that means bringing in the old regime of bureaucracy: “Here’s how we manage large companies in low-risk ways.” So all the bad habits of large companies are brought into the new firm.

Denning: It’s obvious when it’s the core business where this happens. But we have been struck how damaging it can also be in the back office functions—finance, marketing, procurement, legal and so on. The risk and problems in these back-office functions is greater than we had imagined.

Hagel. Let’s face it: in many firms, back-office rules! You can have all the customer-facing operations you want, but the back-office is often where the decisions are made.

Denning: This happens even in firms that were born Agile and where the founders are still around, driving the Agile mindset. In some cases, they were blindsided by their own back-office. It happened without their realizing it.

Can Organizations Be Ambidextrous?

Hagel: This issue came up in the recent Drucker Forum. Some speakers suggested that organizations should be ambidextrous with one part of the organization focused on exploitation and efficiency and routinization and standardization while another part is focused on exploration and experimentation. I’m skeptical. In my experience, the exploitation side crushes the exploration side very quickly.

Denning: Unless the whole organization is committed to exploration, the exploitation side is going to have the upper hand.

Hagel: Part of it is the unrealistic assumption that you are going to be able to keep going in the way you have always done. In today’s world, all functions and all activities need to be agile and need to be continually redefined as you go.

Denning: The number of routine areas, not involving software, and not experiencing unexpected customer demands, is rapidly diminishing towards zero. It’s hard to find any areas like that anymore. Yet like you, I am hopeful and optimistic because we do see signs of “life in the desert.” Gary Hamel is now also optimistic when he talks about “post-bureaucratic organizations”, which is a virtual synonym for Agile.

But here’s a question about size. We are now seeing firms or units of several thousand people operating in this way—Riot Games, Spotify, and units at Ericsson and Microsoft. This is very impressive. But what I haven’t seen is a firm or unit of 20,000 people or more operating this way. A few years back, I hadn’t even seen any units of several thousand. So things have moved on quite a bit in just a few years. But is this as far as it goes? Is there some kind of upper limit around several thousand? Or is it simply a matter of time before we see firms or units of 20,000 or even bigger?

Hagel: We don’t really know. Our work confirms the power of the “immune system” and the “antibodies” that are pretty effective at containing, and sometimes crushing, these different ways of operating. This is why we have put more emphasis on scaling edges, rather than trying to transform the way the entire business is done in the core. It is very hard to scale and sustain that in our experience.

Hagel: Yes. My essay addresses the issues of increasing polarization and the instant dismissal of other viewpoints. If you look at what’s going on, the big issue is institutional misalignment. One side is increasingly fearful about their jobs, their work and their children. The other side is fearful about our institutions which are under attack. There is a fear that if we abandon those institutions, chaos will ensue; hence the need to defend existing institutions. Ultimately, we need to recognize that our institutions are not appropriate. They are increasingly misaligned. They are not serving us well. If we could see that, then perhaps we could see that both sides are right. We do need institutional change. We are not saying scrap everything. We need different kinds of institutions than we have today. And we need to come together to try to create them. So I am optimistic that there is a big opportunity here.

Denning: The Shift Index shows that the economy overall is grinding to a halt. When that is the case, then everything becomes problematic. Is it surprising that in a declining real economy there is political and social unrest and fundamental disagreements? And might we not also surmise: if we could reverse the economic decline, then wouldn’t a lot of the political and social unrest be much less?

Hagel: It’s right that there is decline. If I had to pick two measures of decline, it would be the ROA index and the other would be the plummeting level of trust in our institutions, whether it is in business or government or schools.

Denning: Is the declining economy driving the levels of trust? Or is trust the driver?

Hagel: It’s complicated. Some people are profiting enormously in a world of mounting performance pressure. That causes widespread resentment. Some people are taking advantage of the situation. They are not trying to fix it. They are exploiting it for personal gain.

How Do You Create A Movement For Change?

Denning: Do you see any possibility of creating a movement for change?

Hagel: One of the things we see in the history of movements is the importance of action at the local level. If you look at all the great movements over time, the successful ones all have a basis in grass-roots actions, with small groups of maybe ten or fifteen people who get together and get interested in change. Malcolm Gladwell wrote about this in his article about “the cellular church.” He wrote:

“There was an approach to create a church out of a network of lots of little church cells—exclusive, tightly knit groups of six or seven who meet in one another’s homes during the week to worship and pray. The small group as an instrument of community is initially how Communism spread, and in the postwar years Alcoholics Anonymous and its twelve-step progeny perfected the small-group technique.”

“When churches—in particular, the megachurches that became the engine of the evangelical movement, in the nineteen-seventies and eighties—began to adopt the cellular model, they found out the same thing. The small group was an extraordinary vehicle of commitment. It was personal and flexible. It cost nothing. It was convenient, and every worshiper was able to find a small group that precisely matched his or her interests. Today, at least forty million Americans are in a religiously based small group, and the growing ranks of small-group membership have caused a profound shift in the nature of the American religious experience.”

Change Movements In Business

Denning: How does that apply to business?

Hagel: I see the spread of the evangelical movement with its cellular structure as just one illustration of a much more profound shift in society. I have written about distributed creation and production in such diverse domains as music (remix), extreme sports and even illegal drugs, not to mention open source software and electronics devices. We are seeing this same pattern play out in the evangelical movement. We are moving from consuming religion in central locations to producing (or re-producing) it in our living rooms.

I hold little hope that institutional transformation can come through top down, “big bang” initiatives. Instead, fundamental change comes from scaling the edge, building parallel institutions that can quickly demonstrate growing impact from fundamentally different approaches.

Denning: Those small groups are incredibly vulnerable, and complicated to manage. How do you keep them moving in the same direction?

Hagel: Rather than adopting hierarchical command and control structures, successful movements are all organized around small, local action groups , who work together to achieve impact in very different contexts. These action groups are united by a loosely coupled network that enables them to seek help from others and to observe and learn from the diverse actions of each group what actions can achieve the greatest impact. This aggregation of small, local action groups is a powerful form of organization that I've called creation spaces.

So, if we’re serious about institutional transformation, let’s come together in small action groups in our local communities and focus on how we can start to build the kinds of institutions that will be necessary for us to achieve more of our potential.

We have to think through: What’s the minimum viable institution that can quickly demonstrate impact? How can we scale those institutions rapidly to expand the potential impact?

For example:

• How might we create and evolve new learning institutions that approach learning as a life-long endeavor to create new knowledge in sharp contrast to conventional educational institutions that focus on transfer of existing knowledge in return for a certificate?

• Or how can we build businesses that create environments to encourage everyone (not just employees, but business partners and even customers to learn faster together in order to achieve more of our potential?

• Or how can we establish and nurture local community organizations that connect more effectively with marginalized portions of our population and help them to build on the strengths they already have to create a more prosperous life for themselves and for their families?

To really make a difference, we need to make an effort to reach across the divides that appear to separate us today and bring together people in our action groups so that we can start to discover common ground. We need to demonstrate that, by coming together, we can achieve far more impact than if we stay isolated in opposing camps.

What successful movements have in common are small groups of people, of no more than 10 or 15 people, meeting once or twice a week, above and beyond any regular official meeting or church service. The participants are holding each other accountable, and supporting each other, and discussing how to get more impact around their ideas. That’s what drives a movement. It’s true of every movement I have looked at. If it’s not grass-roots, if it doesn’t get people engaged, it’s not likely to succeed.

I would suspect that a lot of the Agile and Lean approaches in a business context very much apply to these principles to small units of people in order to get impact.

Denning: So in the end, you are an optimist?

Hagel: I think we are far more united than most people would believe – and we have the potential to become even more united, if we understand the real sources of our fears. If we focus on opportunities that can unleash our hope rather than remaining prisoners of our fear, we'll discover common ground that can help us all to shift from fear to hope and, in the process, achieve an impact that most of us would never have imagined possible. We just might be able to evolve institutions that help all of us to achieve our potential.